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Tis The Gift To Be Simple

October 5, 2011 11:37 amOctober 5, 2011 11:37 am

Brad DeLong comes down hard on Tyler Cowen over his attempt to critique the IS-LM model — but not hard enough.

As Brad says, the right way to do economics is usually to start with the simplest model that can get at the essential features of whatever you are trying to understand. In macro — or at least macro that tries to get at monetary and fiscal issues — what you need, at minimum, is to understand an economy in which there are three goods: money, bonds, and economic output. What would a three-good model with these things in it look like? A full-employment version of IS-LM. Add in some form of price stickiness and what you have is Hicks/Keynes. There’s nothing arbitrary about it.

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

There’s something about macro that seems to invite this sort of thing: more even than the rest of economics, macro seems afflicted with people who mistake confusion for insight, who think their own failure to understand basic ideas reflects a failure of those ideas rather than their own limitations. It would help, however, if graduate schools went back to teaching those basic ideas before rushing on to fancy stuff that is often just silly.